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ENTITY
🕰3 min read
🎵Wisdom Density:
Moderate
🧭16 concepts
💬2 quotes
👁 -- readers

Bank of America

Bank of America (BAC) became a major Berkshire Hathaway holding in August 2011 following a $5 billion "White Knight" investment. Reminiscent of his 2008 bailouts of Goldman Sachs and GE, Warren Buffett provided a massive capital injection and a "Seal of Approval" to the bank during a period of extreme market skepticism regarding its mortgage-related liabilities.

🏁 Origin & Investment Structure

In the summer of 2011, Bank of America shares were under heavy pressure due to litigation costs from the 2008 financial crisis (specifically via its acquisition of Countrywide). Buffett called CEO Brian Moynihan while in the bathtub (a story he frequently tells) and proposed a deal:

  • Preferred Stock: Berkshire invested $5 billion in 6% cumulative perpetual preferred stock.
  • Warrants: Berkshire received warrants to purchase 700 million common shares of Bank of America at an exercise price of ~$7.14 per share, expiring in 2021.

(Note: During the 2013 Meeting, Buffett clarified that while the idea struck him in the bathtub, the true origin of the deal lay in him reading "Biography of a Bank" 50 years prior, demonstrating his philosophy that profound investments stem from decades of accumulated knowledge rather than sudden epiphanies).

🚀 Strategic Importance

The deal was a classic "Buffett Deal":

  • Capital Infusion: The $5B shored up BAC's Tier 1 capital ratio and provided immediate liquidity.
  • Trust Seal: The Berkshire brand provided a "halo effect" that signaled to other investors that the bank was solvent and its problems were manageable.
  • Asymmetric Upside: The preferred stock provided a safe 6% yield, while the warrants offered massive upside if CEO Brian Moynihan could successfully navigate the bank out of its legal and operational quagmire.

📈 Operational Milestones

  • 2011: Investment completed. Moynihan continues his "Project New Buffalo" to simplify the bank's operations.
  • The Recovery: Over the next few years, the bank resolved most of its Countrywide-related legal issues and began building a fortress balance sheet.
  • 2017: As the common dividend of Bank of America rose, it became more profitable for Berkshire to exercise its warrants than to hold the preferred stock. Berkshire exercised the warrants, becoming the bank's largest shareholder without spending additional cash beyond the original $5B.

🔗 Connections

[!TIP] The Bank of America deal is the spiritual successor to the Goldman Sachs/GE deals of 2008. It demonstrates Buffett's unique ability to act as the "Lender of Last Resort of Choice" for the American financial system.

📚 Historical Mentions & Citations (4)

Click a reference document below to expand and read the exact paragraph(s) containing this concept in the archive.

📜
2011 LetterExcerpt Available
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Insurance has been good to us. * Finally, we made two major investments in marketable securities: (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and (2) 63.9 million shares of IBM that cost us $10.9 billion. Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course, have many smaller, but important, positions.) We made few changes in our investment holdings during 2011. But three moves were important: our purchases of IBM and Bank of America and the $1 billion addition we made to our Wells Fargo position.
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🎙️
2013 MeetingExcerpt Available
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WARREN BUFFETT: Well, we will send— I think he’s probably referring to something like the Bank of America transaction or Goldman Sachs and GE — and there will come a time, in markets, where large sums — I’ve gotten calls on other things, too, but — DOUG KASS: Thank you, Warren. Mae West once said, “The score never interested me, only the game.” Are you at the point now where the game interests you more than the score? But before you answer the question, let me explain to you why I asked it. In the past, your research has been all-encompassing, whether measured in time devoted to selecting investments and acquisitions, or the intensity of analysis, your interest in the old days of knowing the slightest minutia about a company. You once said, in characterizing Ben Rosner, quote, “Intensity is the price of excellence,” closed quotes. Your research style has seemed to morph over time from a sleuth-like analysis — American Express comes into mind when you hired Jonathan’s dad, Henry Brandt. You and he conducted weeks of analysis and sight visits and channel checks. Not so much in the later investments. As an example, you famously thought of making the Bank of America investment in your bathtub. There is an investment message of this transformation from being intense to less intense. Would you please explain the degree it has to do with the market, Berkshire’s size, or some other factors?
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📜
2020 LetterExcerpt Available
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12/31/20 Shares* Company Percentage of Company Owned Cost** Market (in millions) 25,533,082 AbbVie Inc 1.4 $ 2,333 $ 2,736 151,610,700 American Express Company 18.8 1,287 18,331 907,559,761 Apple Inc 5.4 31,089 120,424 1,032,852,006 Bank of America Corp 11.9 14,631 31,306 66,835,615 The Bank of New York Mellon Corp 7.5 2,918 2,837 225,000,000 BYD Co. Ltd 8.2 232 5,897 5,213,461 Charter Communications, Inc 2.7 904 3,449 48,498,965 Chevron Corporation 2.5 4,024 4,096 400,000,000 The Coca-Cola Company 9.3 1,299 21,936 52,975,000 General Motors Company 3.7 1,616 2,206 81,304,200 Itochu Corporation 5.1 1,862 2,336 28,697,435 Merck & Co., Inc 1.1 2,390 2,347 24,669,778 Moody’s Corporation 13.2 248 7,160 148,176,166 U.S. Bancorp 9.8 5,638 6,904 146,716,496 Verizon Communications Inc 3.5 8,691 8,620 Others*** 29,458 40,585 Total Equity Investments Carried at Market $ 108,620 $ 281,170
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🎙️
2023 MeetingExcerpt Available
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But you don’t know what has happened to the stickiness of deposits at all. It got changed by 2008. It’s gotten changed by this. And that changes everything. And so, we’re very cautious in a situation like that about ownership of banks. And we do remain with one bank holding, a deal, but we originated that deal with the Bank of America. And I like Bank of America. I like the management. And I proposed the deal with them, so I stick with it. But do I know how to project out what’s going to happen from here? The answer is I don’t, because I’ve seen so many things in the last few months which really weren’t that unexpected to me to see.
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